Market Efficiency Revisited

When you unravel all of the puffery, investors either believe that the market is efficient or they do not. Of course in the short term it is very messy and very noisy. Perhaps this is really the wrong question. Even if you believe that the market is not efficient what is the cost of seeking to exploit the perceived inefficiency? In reality , very, very few will manage to outpace the market on a cost and risk adjusted basis.

FHA follow up/ TD Ameritrade ad slogan

You may have read that Bank of America will soon be repaying the government in order to be free from the government pay standards etc. My most recent post mentioned brewing problems with FHA mortgages. Bank of America is the largest originator of these loans and recent estimates of near term losses by FHA range from $75-150 billion. FHA is essentially out of reserves so...these losses could end up being losses for banks that hold these mortgages. Time will tell if Bank of America and all the others are really out of the woods just yet.

I have seen a new ad by our primary custodian TD Ameritrade that is pretty good. It has a tag line/slogan of "It's time for fresh thinking". Indeed it is. It also mentions objective advice which of course we like as well. A lot of ways to interpret "fresh thinking" but a start might be to ignore the typical Wall Street marketing din of "we have a system, manager,black box, fund, etc. that can solve all that ails you". Interesting times indeed.

Housing Improvement

Data out today from the Commerce Department show the first year over year increase in housing sales since this period of 2005. Perhaps of even greater importance is the number of unsold new homes in inventory which has literally been halved since January. While there is still a lot of ground to make up these are some signs of improvement. The South is faring much better than most other parts of the country and essentially all of the gains in recent monthly data have come from our region.

There are of course big dark clouds hovering over residential housing in many areas. A sizeable number of homeowners owe more on their homes than they may be worth in the current market. Most of these owners won't be selling in the near term however and for the main will continue paying their mortgages. As an aside, I recently saw a television ad for a mortgage company touting "no appraisal " mortgages. I really could not believe what I heard but indeed that was in the ad. These type mortgages were the crux of the problem to start with and it troubles me that these are being made again. Some of the data from FHA (which makes 3.5% down payment mortgages) suggests big troubles brewing within that market segment.

Sticky Intuition

Making financial decisions is rarely simple. Both spheres of the brain are involved thereby using both intuition and analysis- feeling and thinking. One of the problems , however, is that intuition can be "sticky" . That is- intuition can be stuck on a wholly incorrect notion and this "anchoring" tends to survive for long periods of time. This plays out in a number of different ways including being stuck on imaginary asset values (for real estate, individual stocks , etc) as well as rates of return, withdrawal rates and so on.

The most important aspect to remember is that very often financial decisions are aimed at either avoiding regret or achieving pride.

Stock Market Rallies- Historical Perspective

Since 1900 there have been roughly 27 major market rallies in the U.S. stock market .So about once every 4 years. Most of these fall into the range of 30-150%. Our current market rally measures 62% from the March 9 bottom (for the S&P 500).The length of these rallies run from 200-800 trading days or about 9 months to 3 years. So, the current rally as it now stands is under the average in both length and magnitude. Just some food for thought.

Where from Here?

Rarely a day goes by without someone (at the store, in a doctor's office,etc.) asking about which direction the stock market is heading. A few days ago I was asked if I was a "bull or a bear"? My response was simple- if you plan on being around for awhile then you have to be a bull. That is the long term answer. The short term- this day; this week; this month may be different but that is not really investing anyway...it is speculating. The headline at lunchtime today on one of the financial news channels was "Should you buy/sell or hold? " What may well serve their "news" interests in filling air time should not be confused with an investment strategy. Long term investors are in the markets for the long term. They expect both good times and bad . It is really just that simple.

Pursuit of Perfromance

As all of our clients know, chasing short term performance is a poor strategy. Generally it is the triumph of emotion over intellect. The simple truth is this: diversified long term investors win as a group and undiversified short term investors lose as a group. Short term out-performance often turns out to be anti-prologue.

Some investors bailed out of the markets earlier this year and are likely still waiting for a good time to re-enter (and have missed a 55% gain). Others have put money into gold fearful of future inflation. These are 2 sides of the same coin and likely will disappoint. Financial goals are accomplished by action not re-action. Our philosophy is grounded in the science of the markets and based on individual client goals. Vanguard founder John Bogle calls this "client stewardship over salesmanship".